Eurozone crisis: markets rally as Papademos is sworn in and Berlusconi's departure nears

• Wall Street opens strongly on fresh hope of resolution
• Austerity measures passed in Italian senate
• Berlusconi will go after measures clear lower house
• New government could be in place on Sunday night

Mario Monti arrives at the senate in Rome ahead of the vote. Photograph: Stefano Rellandini/Reuters

Global stock markets rallied after the new Greek prime minister was sworn in and the Italian upper houses approved the latest package of austerity measures, clearing the way for Silvio Berlusconi to finally quit as prime minister.

On Wall Street, the Dow Jones opened strongly on hopes that Europe might be turning a corner, rising nearly 230 points to 12123, a 1.9% increase. The FTSE 100 index in London climbed more than 80 points to 5527 in thin trading, a 1.5% gain, by mid-afternoon. Germany's Dax increased 3% and France's CAC added 2.6%.

Manoj Ladwa, senior trader at ETX Capital, said: "Despite recent turbulence, equities have finished the week on a strong note as the market reacted positively to news flow coming out of the eurozone. Concerns about Europe's debt crisis seem to be easing as Italy and Greece take measures to address ongoing issues and draw a line under the situation. But given the lack of volume, traders remain cautious and are holding back committing funds until further confirmation of sovereign debt problems being resolved."

Lucas Papademos was sworn in as the new Greek prime minister on Friday afternoon. Evangelos Venizelos has been reappointed as finance minister in the new coalition government, as expected.

Over in Italy, the senate passed new budget measures aimed at boosting the economy and controlling public spending, and they will now go to the lower house for final approval on Saturday.

President Giorgio Napolitano has urged parliament to act fast, and some commentators say a new government, made up mostly of technocrats could be in place as early as Sunday night – before the markets open on Monday.

Paving the way for Monti's appointment, Napolitano made him a life senator, and therefore a legislator, on Wednesday in a surprise move that raised his already high profile.

The president moved quickly to calm markets after Italy's borrowing costs reached levels that could close its access to market funding, a development that could have threatened the future of the entire eurozone.

He gave assurances that Berlusconi would honour his pledge to step down after parliament approved reforms geared to placate the markets, and that he would waste no time in either appointing a new government or calling fresh elections. At first, Berlusconi had insisted early elections were the only option but he softened his stance and is said to be open to a new government.

Sticking point

However, plans to form a new emergency government may be about to hit a sticking point. Berlusconi's party, which is still the biggest in parliament, cannot agree a response to the prospect of a Monti-led government.

To prevent the government from breaking up, two possibilities are being mooted. One is to put forward Lamberto Dini as a rival technocrat prime minister – Dini headed the non-party government that took over from Berlusconi back in 1994. The second is to give a Monti government "external support" – ie a promise to back it in parliament, but without joining it. The latest idea is for a cabinet that includes both technocrats and party politicians.

Monti, highly regarded internationally, has been mooted for weeks as the most suitable figure to lead a national unity government charged with pushing through more austerity measures and badly needed reforms.

It is not clear how much of Berlusconi's PDL party, which has undergone many defections and splits in the past few days, would support the new government. It will be backed by most centrists and the biggest opposition force, the Democratic party. Berlusconi's chief coalition partner, the Northern League, has said it will not back Monti.

The yield, or effective interest rate, on 10-year Italian government bonds, which surged to well over 7% in recent days – above the threshold at which the country's debt burden is thought to become unsustainable – fell to 6.58% on Friday. In one badly needed success that calmed markets somewhat, Italy managed to sell €5bn (£4.2bn) of one-year bonds on Thursday, but had to pay a whopping 6.087% interest – the highest in 14 years.

Monti, highly regarded internationally, has been pushed by markets for weeks as the most suitable figure to lead a national unity government charged with pushing through more austerity measures and badly needed reforms.